Insurers get two years to treat IDFC investment as BFSI exposure

KOLKATA, MUMBAI: The Insurance Regulatory & Development Authority (Irda) has directed insurance companies to treat their investments in IDFC’s fixed-income securities as exposure to the banking sector, instead of their “infrastructure” status, two years after the infrastructure lender turns into a bank.

Most insurance companies have a 25% cap -the maximum investment they can make -on the banking, financial services and institutions (BFSI) sector. In infrastructure, insurers need to maintain a minimum 10% investment, but there is no ceiling.

The regulator’s ruling means insurers, which are the biggest investors in long-term infrastructure bonds, will have to begin realigning their sectoral exposure. But since they have two years to treat their IDFC debt as BFSI investment, any immediate selling pressure on the bonds is unlikely.

IDFC’s banking plans are being crystallised. Last year, it received the Reserve Bank of India’s inprinciple approval to set up a bank, along with Bandhan Financial Services. The company, which has been a key infrastructure lender, had around Rs 34,500 crore of bonds outstanding as of September 30, 2014.

IDFC had requested Irda to allow insurance companies to continue to classifying their investment in its debt instrument -on the date of conversion into bank -as ex posure to “infrastructure”.

Responding to this, the regulator said insurers can classify their outstanding investments in IDFC bonds at the time the institution turns into a bank as infras tructure investments and keep the status for two years. But any new purchase of IDFC’s bonds from the primary or secondary market after the conversion date will be treated as exposure to the BFSI sector.

“There is no fear (now) of oneoff selling in IDFC bonds, which may push up yields drastically,” said Badrish Kulhalli, fund manager, fixed income, at HDFC Life Insurance. “Insurers have multiple options to deal with the matter. While they can sell IDFC bonds in the next two years from the date of conversion (to IDFC Bank), they can also sell other bonds issued by entities under BFSI” so that they can hold on to their IDFC bonds.

“Moreover, if the fund size grows during the two-year time, the internal cap on banking and financial sector bonds will automatically be adjusted,” he added.

Dealers said insurance companies hold less than 10% of IDFC’s outstanding bonds and so won’t have any significant impact on the market even if they start selling the bonds. The rest of the bonds are being held by mutual funds, banks and foreign portfolios investors, for whom business will be as usual.